MNI: China Price Data Assures On Monetary Policy In 2H

China’s prices data came in a bit weaker than expected and suggested room for cuts to the reserve requirement ratio and interest rates in Q3 even with some early signs of an economic rebound underway from sharp lockdown conditions in April, according to analysts.

Prices for pork, a key staple in China, are in the middle of a cyclical upswing, and imported inflation is flowing through to consumer and producer costs.

Also, lower vegetable prices, which mainly dragged down May CPI, remain an area to watch as they may rise with the arrival of the flood season in the following months, wrote Ying Xiwen, senior analyst of China Minsheng Bank Research Institute in a WeChat blog post.

Analysts from Golden Credit Rating believe CPI may remain modest against these factors in the second half, leaving room for monetary easing, as any further pork price gain would be gentle with swine fever at bay, and prices of goods and services may continue to be tamed by weak demand.

Analysts at Zheshang Securities raised their full-year CPI forecast to 2.4% y/y, with August likely to see CPI breaking 3%. May CPI rose 2.1% y/y, flat from April, while PPI eased for the seventh consecutive month to an over one-year low of 6.4% from the previous 8% on higher comparison base and weaker demand. (See: MNI BRIEF: China May Inflation In Check, PPI Sharply Eases)

PPI is expected to continue the downward trend but at a slower pace in the second half with the annual growth likely to be around 5.4% y/y, wrote analysts from Zheshang Securities in a research note.

Rising oil prices will further push up prices of mid- and downstream industries, as a supply gap will remain in the short-term following further European Union sanctions on Russian oil and the limited willingness of key producing countries to largely increase output, the analysts said.

Meanwhile, the resumption of work and production in Shanghai will lead to more demand for raw materials and industrial goods after two months of strict Covid-19 curbs, the analysts said.

The pace of any recovery into the second half remains a question, but May data on industrial production, retail sales and fixed investment due on Wednesday should add some clarity to how quickly China's economy may recover.